NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Market Timing

Erica X. N. Li, Dmitry Livdan, Lu Zhang

NBER Working Paper No. 12014
Issued in February 2006
NBER Program(s):   AP

We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing.

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Document Object Identifier (DOI): 10.3386/w12014

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